Land valuation is a fundamental aspect of real estate appraisal, influencing property transactions, development decisions, and investment strategies. A key part of the process involves distinguishing between the land that supports the property’s current use and any additional land that may—or may not—have independent value.
Commonly, a square footage adjustment is made based on lot size differences among comparable properties without one key distinction – whether the difference in land is surplus or excess land. This fails to consider whether the extra land has value independent of the subject property.
Surplus land and excess land are often confused. Surplus land is land which adds no value independently of the property being appraised. Excess land, on the other hand, has value because it can be divided and sold separately. These distinct differences must be accounted for in an appraisal.
Here we will discuss what constitute excess and surplus land, common methods used to identify each, and why it matters.
Definitions and Key Differences Between Surplus and Excess Land
Surplus and excess land apply to commercial and residential properties. Before determining whether land is surplus or excess, appraisers must consider zoning, highest and best use, surrounding properties and their use, property improvements, and supply and demand for the property and any proposed improvements.
Following these considerations, appraisers make their determination based on the definitions contained in The Dictionary of Real Estate Appraisal, seventh edition (2022).
What is Surplus Land?
Surplus land is any land that is not needed to support the existing use but cannot be separated from the property and sold for another use.
Surplus land is not needed to support the existing use and cannot be sold separately. It lacks an independent highest and best use and has limited utility beyond the support of the primary improvements. Even if the land does not contribute significantly to value, it remains part of the whole.
What is Excess Land?
Excess land refers to land that goes beyond what is required to support the current use of the property. It is distinct in that it can potentially be separated from the main parcel, either physically or legally. Also, it may have a different highest and best use than the rest of the site. Because of its ability to be sold, developed, or used independently, excess land is considered to have its own value and should be appraised separately.
It’s important to note that excess property can include construction of a multifamily property, such as a duplex, triplex, or fourplex—all under the scope of a residential appraiser. “Divided and sold” does not only include subdivision, but it can also include construction for rental purposes.
Methods for Identifying Surplus vs. Excess Land
Residential appraisers commonly make a dollar per square foot adjustment for differences in lot size among comparable properties without distinguishing whether the land is surplus or excess. The problem with this approach is that it fails to consider highest and best use where excess land—land that can be independently sold or valued—creates a premium.
This question cannot be answered without evaluating zoning and legal restrictions of the property.
For example, just because a property is large enough to support a second structure, zoning may prohibit multiple residences on a single lot or there may be legal restrictions in terms of land coverage and minimum square footage requirements. If this were the case, it would be considered surplus land.
When determining if land is excess land, appraisers must consider legal permissibility, physical possibility, financial feasibility, and profitability.
- Legal permissibility. Zoning considerations include minimum lot size and setback requirements. When determining if it is excess land, the excess must meet the minimum requirements for improvements. Building and zoning laws may prohibit construction based on density, lot size, setbacks, and existing covenants, conditions, and restrictions.
- Physical possibility and financial feasibility. Appraisers need to evaluate if the existing improvements leave room for a second structure. Does the shape of the lot allow for construction? And does it make financial sense to add a second structure. Would the cost of development be supported by market value?
- Highest and best use. Market conditions drive whether additional land holds value. In a high-demand area, excess land may support additional housing or commercial use. In an oversupplied market, the same land may be functionally surplus, offering no return beyond its association with the primary parcel. Why the Distinction Matters in Appraisal
Choosing the correct land type has an effect on the final value of the property. Excess land adds value to the subject property and creates future potential. Thus, a higher price per square foot should be assigned to excess land over surplus land.
Surplus land cannot be split. However, that is not to say that larger lot sizes in areas where space is at a premium does not contribute positively to property value, such as an area where privacy or seclusion is worth the expense.
That is why it is important for appraisers to consider the big picture, which includes more than just evaluating whether a property can legally be split. Highest and best use in some areas may include maintaining a larger land area.
Ultimately, identifying land type is about more than just checking if a property can be split. It’s about understanding the property’s most productive use under current legal and economic conditions.
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